Working Out NOI From a Real Rent Roll

Computing NOI from a rent roll and expense records rather than accepting a seller’s advertised NOI is what serious commercial buyers do. The process reveals what the property actually produces after realistic expense treatment, not what the marketing brochure claims. For Salt Lake City buyers evaluating investment properties, the reconstruction process below produces the defensible NOI a lender or sophisticated investor would use.

Start with the rent roll. List every tenant with their unit or suite, current monthly rent, lease start date, lease end date, and any special terms like free rent periods or reduced rate months. Total monthly rent times twelve gives gross scheduled rent. This is the starting revenue figure before any adjustments.

Adjust for vacancy and collection loss. Even fully occupied buildings should show vacancy allowance in a realistic pro forma because tenants roll and downtime happens. Typical vacancy allowances run 5 percent for stable properties, 7 to 10 percent for higher turnover properties, and 10 to 15 percent for weaker submarkets or property types. Collection loss adds another 1 to 3 percent for tenants who fail to pay. The rebuilt effective gross rent equals gross scheduled rent minus vacancy and collection.

Add other income. Parking income if the property has metered or reserved parking. Storage income for buildings with rentable storage. Vending, laundry, or antenna lease income. Late fees and other recurring ancillary income. Total these on an annualized basis based on historical actuals rather than projections. Effective gross income equals effective gross rent plus other income.

Verify expense figures against actuals. Request operating statements for the past 2 to 3 years plus the trailing 12 months. Compare year over year for expense trends. One time spikes should be identified and normalized. Consistent expense growth should be projected forward. Recent increases in insurance, utilities, or property tax should carry forward at recent rates rather than historical averages.

The property tax rebuild. Utah resets assessed value to market when a commercial property sells. The buyer’s post sale property tax typically exceeds the seller’s. Estimate post sale property tax by applying current millage rates to the property’s estimated market value or purchase price. This is often the single largest adjustment between the seller’s NOI and the buyer’s rebuilt NOI on long held Salt Lake City commercial properties.

Add property management fees. Even if the seller self manages, buyers should include property management at 3 to 5 percent of effective gross income. The management function has real cost whether the owner does it or hires someone. Excluding management from expenses inflates NOI artificially.

Add capital reserves. Set aside $0.20 to $1 per square foot annually depending on building age and condition. Reserves fund roof replacement, HVAC replacement, parking lot resurfacing, and tenant improvement allowances at future rollovers. Skipping reserves shows artificially high current NOI that will reverse when capital events hit.

Add realistic insurance. Verify current insurance premium and adjust for any known increases. Wasatch Front commercial insurance has been rising 8 to 15 percent annually recently. Using historical insurance figures on trailing statements understates true forward expense.

Compile the rebuilt NOI. Effective gross income minus all operating expenses equals NOI. Compare this number to the seller’s advertised NOI. The gap is typically 10 to 25 percent, with the rebuilt NOI lower. That gap is what sophisticated buyers use to justify offer prices lower than seller asking prices.

The value impact. At a 7 percent cap rate, every $10,000 of NOI adjustment moves value by $143,000. A $30,000 NOI adjustment shifts value by $429,000. Building the rebuilt NOI properly protects buyers from overpaying by significant amounts on properties where marketing NOI differs meaningfully from realistic NOI.

The lender view. Commercial lenders build NOI similarly for underwriting. Loan sizing depends on lender NOI estimates rather than seller NOI. Buyers who accept seller NOI often face gaps between hoped for loan size and actual approvable loan size, which requires additional buyer equity to close.

Omada Commercial, known as best commercial real estate agents in Salt Lake City, rebuilds NOI on every investment analysis for Wasatch Front clients.